ECO2013 Exam 1 Page 1 of 6 Principles of Microeconomics ECO2023 Prof. Joab Corey Exam Study Guide Economics: the study of how we make choices under scarcity - Scarcity: The concept that there is less of a good freely available in nature than we would like - Scarcity necessitates rationing - Rationing: the allocation of scarce goods to those who want them - Scarcity leads to competitive behavior - Resources: an input used to produce an economic good 1. Human Resources (Human capital) 2. Physical Resources (Physical capital) 3. Natural Resources - The Economic way of thinking 1. Resources are scarce so decision makers must make tradeoffs o Opportunity Cost: the highest valued alternative that is and must be sacrificed when making a decision 2. Individuals are rational: they try to get the most from their limited resources 3. Incentives matter: choice is influenced in a predictable way by changing incentives 4. Individuals make decisions at the margin o Marginal: describes the effect of a change in a current situation 5. Information helps us make better decisions, but information is costly 6. Beware of secondary effects: economic actions generate both direct and indirect effects 7. The value of a good or service is subjective: worth different amounts to different people 8. The test of a theory is its ability to predict - Positive vs. Normative Economics -Positive: The scientific study or what is (testable) -Normative: Judgments about what ought to be (not testable) - 4 Pitfalls to avoid in Economic Thinking 1. Violation of the Ceterus Paribus principle -Ceterus Paribus: All other things constant 2. The belief that good intentions guarantee desirable outcomes -Nirvana Fallacy: The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative. 3. The belief that association is causation -Just because two things happen together, they do not cause each other 4. Fallacy of composition: the fallacious belief that what is the true for one is true for all Ex. Standing at a football game - Microeconomics vs. Macroeconomics -Microeconomics: focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms (trees)ECO2013 Exam 1 Page 2 of 6 -Macroeconomics: focuses on how human behavior affects outcomes in highly aggregated markets such as the nations market for labor (forest) - Importance of Property Rights -Property rights include 1. The right to exclusive use of the property 2. Legal protection against invasion from other individuals 3. The right to sell, transfer, exchange, or mortgage the property - 4 Incentives of Private Property Rights: 1. Incentive to use resources in ways that are considered beneficial to others 2. Private owners also have an incentive to care for and manage what they own 3. Private owners have an incentive to conserve for the future 4. Private owners have an incentive to make sure their property does not damage your property - Production Possibilities Curve: outlines all possible combinations of total output that could be produced assuming- 1. A fixed amount of productive resources 2. A given amount of technical knowledge 3. A full and efficient use of resources - The slope of the curve indicates the amount of one good we must give up to produce more of the other good GRAPH - Factors: 1. A change in an economy’s resource base Increase-> shift outward Decrease-> shift inward 2. Changes in technology 3. A change in the rules under which the economy functions 4. Change in work habits -Law of Comparative Advantage: The total output of a group of individuals, an entire, economy, or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost - Economic OrganizationECO2013 Exam 1 Page 3 of 6 o Every economy faces 3 questions: 1. What will be produced? 2. How will it be produced? 3. For whom will it be produced? - Socialism: 1. Ownership and control of the means of production rest with the state 2. Resource allocation is determined by centralized planning - Capitalism: 1. Productive resources are owned privately 2. Goods and resources are allocated through market prices - Market Organization: A method of organization in which private parties make their own plans and decisions with the guidance of market prices. - Socialism: A system of economic organization where: 1. Ownership and control of the means of production rest with state. 2. Resource allocation is determined by centralized panning. - Collective decision-making: The method of organization that relies on public sector decision making to resolve basic economic questions. The Demand Curve -Law of Demand: there is an inverse (negative) relationship between the price of a good and the quantity that buyers are willing to purchase -Consumer surplus: The differences between the maximum amount consumers would be willing to pay and the amount they actually pay GRAPH Demand vs. Quantity Demanded - Change in quantity demanded is a movement along the demand curve o Caused by a change in price of the good o Increase in Qd is a movement down the curve (to the right) - Change in Demand is a shift of the curveECO2013 Exam 1 Page 4 of 6 o Caused by a change in anything that affects demand other than the price of the good o Price remains constant but Qd increases or decreases o Increase in demand: shift of curve right o Decrease in demand: shift of curve left - Shifters of Demand 1. Change in Consumer Income A. Normal Goods: income Dnormal B. Inferior Goods: income Demand 2. Change in the Number of Consumers A. # Consumers Demand 3. Change in the Price of a Related Good A. Substitutes (Beef and Chicken) Psub DB. Compliments (Cereal and Milk) Pcomp D 4. Change in Expectations A. Expected change in price: P D B. Expected Change in Income: Income D 5. A change in consumer tastes and preferences A. Tastes D The Supply Curve - The law of Supply: there is a direct (positive) relationship between the price of a good or service and the amount that suppliers are willing to produce. (Upward sloping curve) o The height of the supply curve indicates the minimum amount necessary to induce producers to supply that additional unit o Producer Surplus: The
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